Is China on track to reduce its carbon emissions? If so, why is it building so much coal power? In this episode, researcher Lauri Myllyvirta brings data to bear on China’s recent decarbonization efforts and helps demystify the country’s larger intentions.
Text transcript:
David Roberts
It's an uncomfortable fact for US climate folks to contemplate, but the most important decisions about decarbonization in the next several decades are going to be made in developing and emerging economies, primarily China.
China now has the world's largest emissions footprint, even as its per capita GDP remains a third of America’s, with plenty of room to grow. If China doesn't peak and begin reducing its emissions soon, most of the rest of the world's climate efforts will come to naught.
So what's going on with Chinese decarbonization these days? It's difficult to get a clear picture with the bits and pieces that filter through to US media. They're building tons of renewables? But also tons of coal? Their emissions are going to peak soon, but they're also missing near-term targets?
To bring some clarity to this picture, I'm talking with Lauri Myllyvirta. In the 2010s, Myllyvirta worked for Greenpeace in East Asia and became something of a cult figure among energy nerds. Where so much of China discourse runs on vibes, Myllyvirta and his team were relentless in gathering and synthesizing data.
In 2019 he left Greenpeace to start his own research nonprofit, the Centre for Research on Energy and Clean Air, where he serves as lead analyst, though he is currently on paternity leave. He is also a senior fellow with the Asia Society Policy Institute.
We're going to get into what's going on with coal in China, the approaching inflection point in the country’s emissions, and the escalating trade tensions between China and the US.
All right then, with no further ado, Lauri Myllyvirta, welcome to Volts. Thank you so much for coming.
Lauri Myllyvirta
Thank you for having me.
David Roberts
You know, anybody who's been in the climate game for a while has sort of absorbed the message by this point that the real action is in China, that most of what we're doing in the US doesn't really matter in the grand scheme of things. And all that really matters is what China and the rest of the developing world do. Unlike the rest of us, who just sort of absorb that and go on with our lives, you absorbed that and responded by learning Chinese and going to China to learn directly about China emissions. So this makes you a rare bird, and I'm excited to talk to you.
So where I'd like to start is just for my audience, maybe who's not been keeping up with China, maybe. Let's just start with where China is currently in the energy transition. Like what percentage are solar and wind on the Chinese grid right now?
Lauri Myllyvirta
Few things have been happening in China, to start with: clean energy growth has been stellar. Last year saw almost 200 gigawatts of wind and solar installed, which is about the same as Europe has as a whole. Not exactly, but it's in the same scale. So that's massive. But what's also been massive has been energy demand growth. So China's economic growth has been very energy-intensive during and after the zero COVID. And that has meant that emissions and fossil fuel consumption has kept going up, even in spite of this growth in clean energy production. The target for this year is for wind and solar to make up 17% of generation.
That is large because of the huge size of China's market, but it's not yet world-leading. What is impressive is the rate at which it has been going up. And so currently, the situation is that if installations of wind and solar are kept at the level that was reached last year and electricity demand growth normalizes, then we should start seeing fossil fuel consumption come down, or at least stabilize, which would, of course, be a big deal, given that China's ambitious growth has been a driver of global emissions growth.
David Roberts
And what about on the other side of the ledger, EV penetration? This is somewhere where I think China is world leading — I don't know, maybe behind Norway — but where are EVs currently relative to the fleet?
Lauri Myllyvirta
Last year, more than 30% of all cars produced in China were EVs or plug-in hybrids. And that's, again, a very rapid increase. That also means that the share of EVs out of all vehicles on the road is going up quite rapidly. So it went up by three percentage points last year alone. So that's at the scale where it's starting to meaningfully eat into gasoline consumption growth.
David Roberts
Yeah, so this is what I think most Westerners know about China, is that everything is happening, everything on every side is happening rapidly at an enormous scale. That's one of the reasons I feel like it's so hard to get our heads around the whole picture, because all these contradictory things are happening at once. So I want to start with China's short-term situation. Legendarily, the 1990 to 2010 China growth model was massive industrialization driven by coal. And then there was talk of this sort of, "This has peaked out. We're going to pivot." But then in COVID and immediately after, there's been kind of another big spike of Chinese emissions, which are, as you've written, putting its 2025 targets — it has a bunch of 2025 targets for emission intensity and for energy intensity and all these things — in threat.
Why has COVID recovery been so emissions intensive in China? What explains that?
Lauri Myllyvirta
It's not only the recovery, it was really what happened during the COVID period, which lasted from early 2020 to late 2022. So almost three years in China. So during that period, the government kept GDP growth almost at pre-pandemic levels. And they did that by massively stimulating manufacturing, industrial production, and exports. And that meant that the less carbon-intensive parts of the economy, services, consumer-facing industries, took a big hit. And energy-intensive industries, especially stuff like non-ferrous metals and chemicals, saw blistering growth, and that made the whole economy more energy-intensive.
David Roberts
And that was even during the shutdown and all that stuff. So industries kind of kept going?
Lauri Myllyvirta
Yeah, absolutely. So it was hard for people in China to get their head around, because what you saw around you was, of course, everything shut down. So when you looked at things using satellites, you could see that the big industrial facilities were just chugging along as if nothing happened. And there were also things like, there was heavy air pollution in Beijing and people were going, so we did like, air pollution is coming from a source that we didn't know about because everything shut down.
David Roberts
Right, everything shut down, but the pollution's still here.
Lauri Myllyvirta
Yeah, but so there are heavy industry plants and the thermal power plants were obviously running. The other thing that happened in China recently that has been very confusing for us people and including myself, is that real estate, which has been a huge driver of China's commodity demand, energy demand for the past two decades, has seen a dramatic contraction. The consumption of steel for real estate construction halved from 2021 to 2023.
David Roberts
Oh, that's crazy.
Lauri Myllyvirta
All of that was taken up by manufacturing. So basically there was an economic pivot from real estate to manufacturing, and a lot of this is producing industrial machinery for new factories. So, yeah, very dramatic shifts.
David Roberts
Meanwhile, going alongside this, hasn't there been also a big drought that's taken a bunch of hydropower out of the picture? Does that also play into the kind of emissions spike we've been seeing?
Lauri Myllyvirta
Yeah, absolutely. Especially last year. So there was a drought, 2022, 2023. That meant that coal-fired power was replacing hydropower production as well. So that's been basically masking the huge increase in wind and solar that happened at the same time.
David Roberts
Yeah. So one of the things you draw out in your writing is — and this is something I think probably Americans really don't appreciate, I think Americans viewing China from a distance kind of tend to see it as a monolith with unitary intentions — but one of the things you are drawing out is that Chinese economic policy and Chinese energy policy are somewhat at odds. They're somewhat pulling against each other. And this I think you illustrate through the COVID thing: ramping up heavy industry is not in line with the energy policy of China, but it is — so talk a little bit about how energy policy and economic policy have kind of been in tension.
Lauri Myllyvirta
The latest example is exactly this COVID period. So take 2020, Xi Jinping being pledged carbon neutrality, that China would reach carbon neutrality before 2060 and made that a big theme in 2021, talking about strict control of energy consumption, coal consumption growth, strict control of new coal-fired power projects.
David Roberts
Yeah, I remember all the talk about controlling coal, like we're going to crack down on coal-fired power plants. And to my recollection, that came immediately before a massive, massive expansion of coal-fired power plants.
Lauri Myllyvirta
That's exactly right. So this was a genuine intention and a genuine drive from Xi Jinping. But clearly, technocrats had different ideas, and the economic policy shift that was happening at the same time was just not factored into this picture. So it's given the image that we have of Xi Jinping as basically all powerful, that just shows that he can set direction, he can introduce these big themes, but for execution, it's a huge policy machine that can do different things. And this isn't the first time by far. So there have been episodes where energy shortages have been caused by, for example, a drive to crack down on coal mining at the same time that economic policy was driving big increases in energy consumption and so on. Or economic policy leading to a shortfall against the targets that have been set. And it's clear that there just is a bureaucratic disconnect here.
David Roberts
Generally, what I would say about the US, and I wonder if it's fair to say about China too, is that when economic policy and energy policy come into conflict, it's generally going to be energy policy that gives way. Like keeping the economy humming is sort of like primary.
Lauri Myllyvirta
That has varied as well. So there have been times when environmental goals have been pursued, even at major economic cost. For example, the case with the 2017 drive to meet air quality targets, even going back to 2010, when there was a big shortfall against the energy intensity target, and so on. So after the 2017 drive to eliminate small scale coal burning, which caused a lot of people to lack heating in the middle of winter, these kinds of last minute pushes have been labeled "campaign style." And, well, obviously you don't want that as the outcome, and it's not going to lead to good outcomes in the long term.
But the point is that environmental goals can shape policy, and what's happening now is basically what I would call supply-side climate policy. So basically going very easy on any kind of controls on emissions or new projects and so on, but making massive investments into supplying solar panels, batteries, EVs and so on, and seeing how far that goes.
David Roberts
Well, let's talk about this in the context of 2025, which is just next year. All these 2025 targets are on the books in China and are out in public, and this recent emissions spike puts them all in threat. And one of the things you've written is that to still hit that 2025 targets, there's going to have to be a rapid drop in emissions that is sort of more rapid than anything we've seen recently. Do you think China has the will to do that? Like, how, you know, how big of a deal would it be for China to miss those 2025 targets?
Like, is it really motivated to do what's necessary to hit them at this point? Because it would take pretty dramatic action.
Lauri Myllyvirta
Unfortunately, we got the answer on that. So the top political meeting of the year, the National People's Congress, the targets that were announced for this year, will not put China anywhere near on track to achieve this. So the political will is not there. There is no plan to reduce emissions in absolute terms from 2023 to 2025, which is what it would take to meet these goals. It's still possible that they will be met. So what's been happening with clean energy is that the deployment of solar and wind especially, and the shift to EVs and so on, has been happening much faster than the central government has been targeting.
So it's been driven mainly by provincial and local government ambitions and state-owned enterprises and so on. And so that means that it's possible that things will happen faster than the central government is prepared to target.
David Roberts
So it might hit the targets despite itself.
Lauri Myllyvirta
Yeah. So I think it's likely that we will see a reduction in emissions from 2023 to 2025. I think probably it will not be large enough to meet those targets, but it's still a lot better than what the general expectation has been and what the government is targeting for this year.
David Roberts
Well, I want to return to this question in a minute, but just now, if emissions do stop heading up and start heading down between 23 and 2025, is that the much-discussed peak of Chinese emissions? In other words, is that the structural peak, will they continue going down after that in perpetuity? Or is this a thing where we're at a plateau and they're going to go up and down for a while?
Lauri Myllyvirta
So China's committed to peaking emissions before 2030.
David Roberts
That's the goal on record, right?
Lauri Myllyvirta
Yeah. And that's a much higher priority commitment than the 2025 commitment: reneging on that would be a massive embarrassment. And they are very much personally linked. The emission peaking was always very much personally linked to Xi Jinping as well. So I think that will probably be hit. There is a possibility that there is another rebound in emissions. It already depends on two things: One of them is economic policy. So, does China finally go ahead with this shift from investment driven to more of a consumption-driven economy? And the other one is the clean energy deployment.
There are currently hugely diverging views and proposals on how fast the country should go on solar and wind. The photovoltaic industry is saying that installation should be above 200 gigawatts. The wind industry is saying it should be more than 50 or 60, and so that means about 250. And the National Energy Administration is saying let's target more than 100.
David Roberts
That's quite a delta.
Lauri Myllyvirta
Yeah. So which one of those prevails will determine whether clean energy growth is fast enough to cover all of the growth in energy demand.
David Roberts
Interesting. So the two big narratives about China that I think reach America are kind of directly contradictory to one another. And this is, I think, part of what causes so much confusion over here. One of those is the growth of coal and the other one is the growth of cleantech. So let's talk about the coal thing first. So, like I said, we had this massive coal-driven development for decades, and then there was supposed to shift, supposed to stop. They're supposed to be cranking down coal. But then permits for new coal plants have been spiking, have been soaring since 2021.
So you hear this, you know, you hear this in the US and people say, "Oh, China's not serious. Quit looking to China, quit — you know, China's just building coal. All China cares about is economic growth," et cetera, et cetera. You know, it gives a lot of ammunition to kind of the deflationists here. But then the other sort of counter narrative that you hear is, "Sure, China's building all these coal plants, but it's not running them. It's not running them very frequently. They have very low capacity factors and the amount of coal electricity produced is not rising very much."
So what's going on? What's going on with the coal plants, why are they building so many coal plants?
Lauri Myllyvirta
Well, what's been happening so far is that those plants have been utilized. So the average utilization of coal plants is fairly low, around 50%. But it has not been going down in spite of the increase in capacity. And it's really coal-fired power that has driven the increase in emissions. The part of the latter argument that is true is that the plan, the government's plan, is that coal plants will move into more of a supporting role. Their utilization will fall, so they provide capacity when needed, but generation won't keep going up.
David Roberts
A little bit more like how gas — the role gas plays in the US grid, sort of?
Lauri Myllyvirta
Yeah, exactly. And so that's the other thing that I'm certainly concerned about, the build-out of coal-fired power plants. It does complicate the energy transition, but also the argument that people make that if they're building new coal-fired power plants, that certainly means that they're going to be running flat out for 40 years, that's — what's important to realize, is that the economics of a coal-fired power plant in China are much closer to a gas peaker in the US than to a coal plant in the US. The capital costs for building a new coal-fired plant in China are incredibly low.
The fuel costs are more or less the same as anywhere. So that just means that the amount of capital tied to it isn't anywhere near as large. And also, China has a very high tolerance for redundant or stranded assets.
David Roberts
Yeah, I was going to say if they're building them and running them, that looks bad relative to their environmental goals. But if they're building them and not running them, that also kind of looks bad because it just looks like incompetent energy policy. I would think they would be sort of embarrassed on either end there. It's a little odd to me that they're letting it go on. One of the things you sometimes hear is that part of the explanation here is a difference between the sort of intentions and goals of the central government and then the sort of incentives facing the provinces, specifically on coal policy.
Is there a difference there that's worth noting?
Lauri Myllyvirta
In the most recent coal power boom, it's going to be the other way. So it's been the central government that has been the most keen on nuclear-fired power plants and they've been pushing, especially the power companies, to build —
David Roberts
Yeah, that's the reverse of what I usually hear. Is that a change?
Lauri Myllyvirta
Yeah, that's a big change from the previous surge. So there was a huge wave of permitting around 2015, 2016 that the central government clamped down on. But so now they got concerned about capacity adequacy, and that's what has prompted this. And so the heart of the issue is that if you look at the numbers, China has enough capacity — coal, gas, hydro, nuclear, so controllable capacity — to comfortably cover electricity demand under all circumstances. But the way that the grid is managed, this capacity is not being made use of efficiently. The bots don't operate flexibly, they don't respond effectively.
The changes in demand, and especially the flows between provinces, are not responsive to this.
David Roberts
That's something that you've written that I found totally fascinating because, of course, here in the US, this is a massive current frustration. Is our utility areas acting like islands and not sharing with one another and the subsequent inefficiency that that produces is fascinating to me to hear that that same thing is kind of going on in a similar way in China, that they're not sharing power between provinces, basically. So all the provinces are acting as islands, so they're building all this kind of, you know, low utilization, extra capacity. Is that policy? Is that physical infrastructure preventing that?
Like, why is that happening?
Lauri Myllyvirta
It's institutional. So, in the US, in Europe, getting transmission lines built is a big issue.
David Roberts
Yes.
Lauri Myllyvirta
In China, that's not a problem, they're investing a lot in transmission capacity and have not had trouble securing the permits to build. So the issue is that even when those lines exist, the way that they're utilized is planned. There's a fixed amount of electricity that gets sent through on a schedule. So when we've had these episodes, when a certain province or region in China has an electricity shortage, they've often kept exporting to other parts of China while they've had blackouts or had to restrict electricity consumption locally. So it's not even that you're not getting electricity through those wires when you need it, but you keep exporting because you have an obligation to do that.
David Roberts
It's curious, with China racing ahead on clean energy and racing ahead on the transition, that it has neglected grid flexibility, which is so core to this whole project. You're not going to get there without grid flexibility. I would have sort of guessed that, like, China is cutting edge on that too, but it sounds like it's behind. Is that — are policymakers cognizant of that problem, and are there efforts underway to sort of, like there are in the US, to sort of manage the grid differently in a more kind of flexible way?
Lauri Myllyvirta
Energy market reform has been a huge topic for a long time. There was a goal announced in 2015 to have a national unified power market by 2030.
David Roberts
I remember that.
Lauri Myllyvirta
And so that 15 years timeline to start with just shows how reluctant the government is or how tremendous the obstacles to that are, because in China generally, if you want to get something done, you don't take 15 years to do it. So basically, the way that I look at this is when you have a system that creates a lot of capacity that is redundant, that system also protects that capacity. So, if you suddenly overnight started running China's power system in the most efficient economic way and the way that minimizes emissions, you would have a lot of coal plants that would be immediately out of business, that would see very, very low utilization. And obviously those coal plants are owned by powerful interests.
So that's really the sticking point.
David Roberts
Interesting.
Lauri Myllyvirta
And my big concern about the new wave of coal plants is that it just makes these obstacles so much bigger.
David Roberts
Yeah, right. So, yeah, that's a very familiar story. So you sort of race to build extra capacity that you don't need, and then once you have it, it starts justifying itself. It starts defending itself.
Lauri Myllyvirta
Exactly. And it's the same power companies that are supposed to build these coal plants and they are supposed to keep building the clean energy.
David Roberts
Oh, is that so?
Lauri Myllyvirta
That's the other conflict of interest. Are they going to keep installing their clean energy that will cannibalize these coal plants?
David Roberts
Oh, right. So they sort of have to cannibalize their own assets. That's a sticky position. Well, before we leave the subject, and I was going to talk about this later, but let's just talk about it now. Then that power, the liberalization, the idea, I think the headline I sort of heard back in 2015 is "we're going to do a carbon trading system." And I think a lot of people heard that and they're like, "Oh, it's going to be something like the EU's system." I haven't heard much about it since then. It's been nine years since then, I haven't heard a ton about it.
And from what I've heard, that whatever is going on and under the name of liberalization, it certainly doesn't look like the sort of power markets we have here, the merchant power markets we have in our deregulated areas. So has it come to anything? Has it had any effect? Or is this kind of just, is this a headline that just faded away or is there actual progress happening on liberalization? Is there a trading market going now?
Lauri Myllyvirta
There's a lot of long-term trading happening. So a significant share of all electricity is sold under long-term bilateral contracts rather than on fixed tariffs. And so that is a form of price discovery, of course, introducing some market discipline. It's also a system that is increasingly being used to create incentives for renewables. So under these, the central planners have been promoting, in a lot of ways, direct contracts between large consumers and renewables plants. So that is happening. There are spot markets that have been created in some provinces and more are being created. At some point, we will start seeing more spot markets connecting different provinces.
There was a new big policy document that laid the groundwork for that. So I think things are inching along towards that 2030 target. It's just that all of that has been happening too slowly to address the current woes on the market. And so that's when I was — I've been raising this over the past few years because these are institutional issues. In principle, they could be addressed a lot faster, even a lot faster than it takes to build a new coal plant. But that perspective hasn't really gotten a lot of traction.
David Roberts
Well, it sounds like part of the reason is that it's sort of pushing into some headwinds, pushing into some. If the companies charged with carrying out the liberalization stand to lose money on their coal plants from doing so, you can sort of see why maybe it's going slower than it could go.
Lauri Myllyvirta
Yeah, for sure. And every province wants to protect their own capacity. So, yeah, it's tough going.
David Roberts
Is that part of the reason why they're not sharing across provinces as sort of like the provincial officials are sort of responsible for economic growth in their own province, and they mostly just want to make sure they never fall short of capacity and so they don't want to share. Is that kind of what's driving the islanding?
Lauri Myllyvirta
The key incentive is that you want to have as much power generation happening within your own province as possible because that maximizes economic output, that maximizes tax revenue. It's the same logic with steel and cement and so on, every province having their own industry for those. And also local coal plants will buy coal from local mines. So you're basically maximizing your market share in the coal mining business as well for those provinces that do have coal mines.
David Roberts
That's interesting. So then the other narrative, much more fun to talk about is the massive growth in clean energy. And you say, quoting here "For the first time, the rate of low carbon energy expansion is now sufficient to not only meet but exceed the average annual increase in China's demand for electricity overall." So just to unpack that a little bit, one of the things the whole world is feeling angst about is we're adding a ton of clean energy. But thus far, in aggregate, it's just additional. We're not reducing the use of fossil fuels, we're just adding a bunch of renewables on top of that.
And fossil fuels are growing and renewables are growing, but, but everything's growing. So what you're saying is that China is finally growing clean energy fast enough that it's going to kind of inch over the top of that hill and fossil fuel use might actually start declining. That seems to be like a remarkable historical event. Like it's — how confident are you in that, uh, in that statement?
Lauri Myllyvirta
So there are two ifs:First one is, it's assuming that clean energy additions are maintained at least at 2023 level. And the other one is that electricity demand and energy demand growth come down from the recent surge to more long-term average levels. Both of those are serious questions. I'm quite optimistic about clean energy deployment. There are headwinds pushing against it, especially grid access for the massive amounts of solar being added. But I think the enormous economic bet that so many Chinese provinces and companies and so on have made into manufacturing just means that the push to keep deploying will be powerful enough.
The other question is about energy demand growth and electricity demand growth. I think that the drivers of the current surge in electricity demand have mostly run out of steam. So the manufacturing expansion has just saturated so many markets that there isn't really space for that to continue much further. The other smaller driver, air conditioning and electrification of heating, is going to continue, but that will also probably slow down from the recent jump as well.
David Roberts
Hydro will come back a little bit. Is the drought over?
Lauri Myllyvirta
Yeah, in the short term this year and maybe next year, the recent drop in hydro should be reversed. So currently the hydro reservoirs are full to the brim and the long-term forecast is showing good rains.
David Roberts
Let's talk about that grid thing for a second, because you mentioned it, and I meant to ask about it earlier. The big problem here in the US that Volts listeners are very familiar with is that the economics of solar and wind are great and there's all these subsidies flooding in. So sort of the financial side of it looks great, but it's very, very difficult to get access to the grid. It's like the grid interconnection queues are incredibly long and, and then there's all this, you know, NIMBY opposition, there's opposition from local communities. There's all these sort of non-financial barriers.
If China's grid is so, you know, sort of inflexible and poorly run: How big of a headwind is that for solar and wind expansion? Like, can the grid tolerate all this? Like 250 gigs or whatever you said a year? Like, can the grid absorb that?
Lauri Myllyvirta
So far, it has been able to. China first ran into these problems with integration of wind and solar, especially wind at that point around 2015. And at that point, with extremely low shares of wind and solar generation in the mix. The rates of curtailment were reaching 20% in some provinces.
David Roberts
Yeah, I remember that they were building all these headlines about, "We're building wind out in the middle of nowhere and then just not running it, and it's just sitting there." I remember that wave of headlines.
Lauri Myllyvirta
Yeah. And so that got resolved. Curtailment got brought down well below 5%, which was set as the red line. So it shows that there was capacity to tweak things on the margin sufficiently to get to where China is now, which is that around 17% wind and solar. But the problems that are currently coming up with that 17% are much bigger than they should be. There are other powert markets that have much higher shares and that are not running into these problems. So that shows the impact of the issues with inflexible grid operation. The good thing is that because so many provinces have a strong interest in keeping deployment going, because they have local manufacturing, because it's a key economic driver bringing in investment for them, there is a strong incentive to resolve these issues.
The other thing that is being discussed is that the red line of no more than 5% of curtailment might be eased to 10%. So last year, new, especially solar project started to be denied grid access because the grid operators thought that they won't be able to stick to 5% if they let them on. But so if that's raised to 10%, then that would, of course, create some uncertainty and weaken the profitability of projects. But I think the project economists, for the most part, can take that, and that would enable a lot more capacity to come on.
The other thing that is starting to happen in China fast is storage. So there's almost 200 gigawatts of pumped hydro storage in the pipeline, and even battery storage was more than ten gigawatts last year and could go up very fast from there. So I think what will become a lot more common, or has already become a lot more common, is requiring wind and solar projects to have on-site storage for a specific percentage of their capacity. And also, when the time of use tariffs start to differ more so the difference between daytime and nighttime or evening and daytime tariff increases, then that can simply make grid-connected batteries good business as well.
So the engineered solutions are starting to happen too fast in a way because of the institutional constraints, but eventually you're going to want that storage in place. So it's just doing things in a slightly suboptimal order.
David Roberts
Right, right, right. But this surge of storage is going to certainly help with the flexibility problems. So you mentioned something in passing that it's a little wild to me that I want to pull out by way of the next question, which is: provinces want to continue installing cleantech because they are manufacturing so much cleantech and they want somewhere to put it. So like this is, I think this is something that completely foreign to the US. You know, like we're over here just like thrilled and celebrating that we're getting a few factories here and there, but in China, like you call them, the new three: solar, electric vehicles and batteries. The manufacturing of those three is starting to be a real force, a real economic force, a real force on the grid.
So tell us a little bit about — I mean, you wrote this post which I just found remarkable, which said that the new three are basically responsible for most of China's recent GDP growth. They're absorbing all the investment in manufacturing. They've given China, they've sort of extended China's manufacturing heavy economic strategy. They're just playing like a really big role in China's economy in a way I think that it blows the US mind. Are they a substantial political force of their own now?
Lauri Myllyvirta
Right. So last year we estimated that out of the 5% GDP growth that China clocked, two percentage points, so 40%, came from cleantech. In a slightly broader sense: so solar batteries and EVs were the biggest ones, but we do include a bunch of others from EV charging to railways and so on. And that is huge. So understood in that way, it's bigger than any other economic sector and in terms of investment, it was even larger. So all of the growth in investment came from these sectors. And overall, about 10% of all fixed asset investment went into cleantech.
And that means that they are politically, they've become a part of China's macroeconomic policy. So that makes them politically important. Certainly the issue is the same as everywhere, that they're not as powerful as they should be because they're not as well organized as many other interests. But still, simply the fact that they are such a big part of economic growth at the moment makes them also politically important.
David Roberts
Is there sort of open political tension now between that sector and the coal sector, which is sort of struggling to survive and feeling this weird surge are those contrasting political forces?
Lauri Myllyvirta
If you look at the messages that are being put out: So on one hand, arguing that those sectors have grown too fast, it's overheated, it's uncoordinated, it's causing issues with the grid and so on, on one hand, and then on the other hand, the industries themselves, solar and wind and so on, saying that they can keep going at least as fast going forward. That's a big gap in messaging. So, of course, the outward phrasing messaging is very polite and constructive, but I definitely see a lot of tension there and a big divergence in how different players are seeing this future scale of deployment.
So there's still a lot of messages from the government saying, "this needs to be sped up, it should be going faster." And then there was this message from the National Energy Administration that was just saying that "we should be targeting maybe half of what we did last year."
David Roberts
Oh, so that's a pretty substantial diversion in outlooks there. These sectors have been running really hot, really fast, and we seem to have entered an era where they are overproducing, at least for the Chinese market, and consequently they're just exporting a bunch of it for super cheap, which other countries are referring to as "dumping." And now we've got Janet Yellen on her way to China, I think, with the intention of scolding them for this kind of overproduction and dumping. Right now — before we talk about the politics, let's just talk about the economic strategy: They did this manufacturing heavy industry, heavy growth model, and there was all this talk, I want to say 2015 ish, where like "this strategy has run its course, there's not much left they can do. They're going to have to pivot, like all advanced economies do eventually, to a more service-based economy and cool down this manufacturing growth."
But then the growth in clean energy industries and cleantech sort of opened up a whole new avenue for them to invest more in manufacturing and more in industry. So it's sort of extended that strategy even further. But now we're in overproduction on cleantech, too. And now, finally, is China really going to have to pivot? Like, are they, do they think they're going to have to pivot, or is there juice left in this strategy still?
Lauri Myllyvirta
Well, so, first of all, the huge drop in the costs of solar and batteries, especially, a lot of that is real advances. It's building new factories that are far more automated. It's making solar panels that are thinner and more efficient and so on. So all of these things are happening, and there are real, genuine technological advances happening simply from the basic learning curve of solar. When you're more than doubling production, you would expect production costs to go down a lot. But at the same time, yes, production capacity has run well ahead of demand, for example, for batteries.
But also, I think we do need to wait for the reaction from the global market, because at the current prices, solar and batteries are just going to be very competitive for a lot of markets. They could outcompete gas-fired power plants and obviously coal-fired power plants in a lot of places. And already what we're seeing is that the drop in prices is driving demand or driving deployment well beyond what was being projected recently. So we're already in the territory where we don't really know what the demand is at the current prices. And I'm sure that there are a lot of players who haven't internalized what these cost reductions — 50% reductions in one year — mean for the potential of these technologies.
So that really has the capacity to upend global energy projections in a major way.
David Roberts
This is something that I come back to again and again, I don't feel like I fully understand. From my perspective here in the US, like, if China wants to — I mean, you could argue about the wisdom of this, continuing to dump money into industry and manufacturing, sort of into the neglect of the consumer sector. You could make criticisms from within China about whether that's wise. But from the US perspective, they're making some sacrifices in order to create incredibly cheap, clean energy technology. And it seems to me like the rest of the world ought to be saying, "well, thank you," like, you know, like, "Way to go. This is awesome. Let's all buy a bunch of this cheap energy tech and accelerate the energy transition."
Like, it seems like it ought to be good news. And yet, country after country is complaining to China about it and protesting China. So, like, what is it? Why is it that Chinese overproduction is causing such angst in other countries?
Lauri Myllyvirta
Well, I think it's a legitimate concern that the supply chains for some of the most critical technologies of this century are very centralized in one country, in any one country. And China, of course, has a history of using trade policy as an extension of foreign policy and so on. So I think diversification is a very legitimate goal. There's been more talk and anger about it than productive action. Certainly in Europe, the US has made some headway, kept the supply chains more diverse, but at a cost of making solar, for example, more expensive than it would be otherwise.
So it's a balancing act for sure. And the speed at which China's driven costs down and supply up has just taken a lot of people by surprise. So policies that were deemed adequate to achieve that diversification just a couple of years ago just look very cute at the moment.
David Roberts
Do you think China is trying — other countries are saying "We need to diversify away, 95% plus of these supply chains are located in China. We need diversification." Is China pushing back against that? Like, does China want to keep 95% of these supply chains, or does it acknowledge on some level that diversification is necessary and inevitable?
Lauri Myllyvirta
China is pushing against the policies. So basically taking a stance where the policies that China has in place that result in this concentration are just taken as a given, and anything that tries to challenge that is seen as anti-competition, anti-globalization, whatnot, which partially has to be rhetorical. China has been very careful to ensure that it has full control over the supply chains for itself, for solar, wind, nuclear, many other technologies, and has used very aggressive industrial policies, trade policies and so on to do that. But the thing is that when you are in China and when you're in the Chinese system, a lot of those policies just seem natural to you. So you don't see them as market interventions.
David Roberts
Well, this strategy has been going on for decades now. So there's lots of people who in China, I imagine, have never known anything else, really, than this kind of push, for sure.
Lauri Myllyvirta
And for the global trade system, it's a challenge that you have a country that can introduce major subsidies, major trade barriers, and so on, without ever committing anything on paper, in public, because you can instruct state-owned banks that are commercial in name to issue low-cost loans. You can have provinces and so on putting up major subsidies without ever acknowledging what's happening or quantifying it. So it's something that is certainly hard to challenge, and the global trade system just isn't prepared to deal with it.
David Roberts
Yeah, well, I want to talk about the trade politics a little bit. So now, what you hear is China complaining about US policy. The US passed the Inflation Reduction Act, and there's a lot of, you know, part of the explicit goal of the Inflation Reduction Act is to onshore or friendshore some of this supply chain, and that involves some domestic content requirements. Trump put in place big tariffs and a lot of those Biden has kept in place. So, I mean, I guess from the US perspective, you know, the idea of China complaining about another country's industrial policy is a little bit rich, you know, given their multi-decade history of doing it.
But do you think China, I mean, is there any merit to China's current complaints or are they all just kind of for political show? What do you make of, what do you make of China — sounds like — complaining about other countries doing exactly what they've been doing?
Lauri Myllyvirta
If you look at it from China's perspective, there are so many sanctions and different trade actions with different motivations that I know. I don't think the Chinese policymakers or the public will look at the case for tariffs or industrial policy on clean technology in isolation and judge that on its merits when there are other things like chips and whatnot that are expressly trying to hinder China's development in some areas. So I think that kind of nuance gets lost. So even if there is a justification for some of them.
David Roberts
So they see it kind of, as of a piece with a larger hostility?
Lauri Myllyvirta
That's my experience from the conversations that I'm having.
David Roberts
And do you think from the US perspective — there's all these sort of justifications cited for why the US is trying to — not shut down Chinese imports — but reduce Chinese imports, or in some sense, fend off Chinese imports. There are, you know, talk about supply chain security, like you mentioned, like it's just might just, it just makes more sense to have a little diversification. But there's also a lot of national security talk going on about Chinese spying and Chinese trying to steal intellectual property and China, like, you know, to the point now when we talk about Chinese EVs in the US, I mean, it's gotten a little hysterical. There's talk about "What if the Chinese put cameras in their EVs and record our behavior or record our streets?" or whatever.
It's gotten a little heated. I just wonder from your perspective, how much of that is warranted and justified. Do you think the US has real justified concerns about China? Allowing Chinese stuff in is tantamount to allowing Chinese spying and IP theft in?
Lauri Myllyvirta
Data privacy is of course, a huge thing. And all the devices that we have from EVs to mobile phones, are just producing a tremendous amount of data. But this is really outside of my expertise, like how big a problem it is in actual fact. I've seen the same alarming headlines as you do, but it's really outside of my expertise.
David Roberts
Part of what I'm asking here is it looks to me just on a kind of a macro level, like we are rapidly heading toward something like another cold war where the US just sort of instinctively and by default views China as a hostile competitor. And, you know, you can find people, I think, who will make the argument if we're going to solve climate change, we're going to need to cooperate. We desperately need to cooperate to solve climate change, and yet we seem to be heading towards, toward a kind of cold war. Do you worry about that?
And I'm sort of curious, like, what China makes of all this recent kind of anti-China hysteria. Are they, you know, I mean, it takes two to tango. Are they heading, you know, do they view themselves as heading for a cold war, too? Is there any prospect of that not happening?
Lauri Myllyvirta
I view the idea that the US and China need to cooperate as a bit overdone. I don't think there's a lot to cooperate on besides diplomacy. The one thing that we have seen is that when the US and China are able to work together diplomatically, like they did with the Paris agreement or with the run up to the Paris Agreement and securing common agreement on new initiatives before big international climate conferences, that can really smooth the way for things. But that's really diplomacy that should proceed based on common interests. But beyond that, I don't think there's a lot of space for cooperation.
I see Obama deal before the Paris agreement came, at a time when in both countries there was a dynamic where announcing these goals together really helped move things domestically. But that dynamic just doesn't exist anymore. So currently, if you just think about Biden meeting with Xi Jinping and coming back with a deal, everyone would just, on climate that introduces new commitments for the US, everyone would just view that as a cave in and a bad deal. And I think largely the same goes for Xi Jinping. Well, that's a result of the changed geopolitics, but it's a reality. So I think currently a competitive dynamic, if it's competition in industrial policy, in deploying and developing clean technology, in financing and exporting to third countries and so on, I think that dynamic has a lot more potential to drive things along than cooperation.
David Roberts
Oh, interesting. And you don't have any worries that some elements of that competition, like trying to block each other's manufacturing and trying to grab onto pieces of the supply chain, all this, you don't worry about any of that slowing the overall progress. You think it's mostly healthy.
Lauri Myllyvirta
It has the potential to do that. And also, one thing that I've seen in the US is that there are certainly people who are so, seem to be a lot more concerned about imported Chinese solar panels than imported Chinese steel or other stuff. So it's also being used as a way of attacking the clean energy industry. So it's such a complicated dynamic. But also if you do end up in a point where all cleantech is made in China, that's not going to play well for the political economy of the energy transition. And especially in Europe, we still have, for example, a strong wind industry.
If that gets overrun by Chinese manufacturers, then that doesn't make things easier for the transition. It's a delicate dynamic. And given the fact that, for example, solar supply chains are so concentrated in China, there's no option of just hitting pause and rebuilding new supply chains elsewhere and then starting to do solar. So we have to keep doing solar while introducing this diversification and not hurting that deployment too much. So it's a policy challenge, but I don't think it's unmanageable. Mainly it's a question of being willing to pay the cost, which, as you noted, currently China is throwing a lot of money at these technologies and making them cheaper.
So you're partially foregoing that if you're diversifying and accepting the cost of that is what needs to happen if you do want to diversify.
David Roberts
One of the big news stories here in the US just last week was a huge new round of grants from the government to industrial decarbonization. The idea in the US is that electricity decarbonization is underway. We kind of know what we're doing on transportation. That's kind of underway. But industrial decarbonization of steel, concrete, et cetera, has lagged behind and we're just now getting in that game. I'm curious with China, that question of industrial decarbonization is a much bigger deal because as we've been saying — it's remarkable, China's per capita GDP is still about a third of the US's, but its overall emissions are higher, which is just mind blowing just because it's got this incredibly industry centered economic development plan.
So for China, the question of industrial decarbonization is a very, very big deal. Is that underway? Is it neglected there too, or is that, are they ahead of us on that? Where does that stand in China?
Lauri Myllyvirta
After the pledge to target carbon neutrality before 2060, there was a process of developing carbon peaking and neutrality plans for just about every industrial sector in existence. So it's not neglected. That thinking has been happening. What unfortunately happened was that the whole process of coming up with these plans for first the overarching national plan and then the sector specific plans happened at a time when there wasn't a mandate to set strong targets. So these plans became incredibly general. Almost every sector is just targeting emissions peak before 2030 and so on. There are some sectors where — first of all, electrification has been happening very fast in China, so electrification of industrial energy use.
And that has set the industry up, of course, to reduce emissions when the grid emissions come down. The other thing where there is huge potential is steel, which is the largest emitting industrial sector. Production has stabilized. Domestic demand is highly likely going to start coming down after stabilizing for the past few years. And at the same time, you have a massive supply of scrap steel. So there's enormous potential for replacing coal based primary steel production with scrap based steel production, and that could bring emissions down by 30% over the next decade.
So there's still a lot of mileage in this shift before you have to start scaling up hydrogen based steelmaking and so on. But so hydrogen strategy is in place. Hydrogen is starting to happen as well. It's currently not being deployed at a scale because the government made the call that this is not yet the time because there is still so far to go in terms of decarbonizing the grid, which is, I think, the right call to make. If you diverted a lot of the clean power generation to making hydrogen for industry, then you would not be doing yourself any favors in terms of the overall emission trajectory.
But the pilot projects, the technology development for hydrogen based steelmaking and so on, all of that is happening.
David Roberts
Interesting. Yeah, it's a good lesson for the US to keep in mind too, about hydrogen. The final question is, and this is something a bunch of people ask all the time, and I never know what to say, which is: you know, what we've been discussing are sort of internal forces in China pulling and pushing it this way and that, and sort of how they're balancing out. Is there anything that the US can do to meaningfully influence China to accelerate this process and to just take it all more seriously? Or is China sort of operating on its own internal forces and reasons and doesn't much care what other people think?
Is there anything the US can do basically productively to help China speed up?
Lauri Myllyvirta
I think there is. So for any big country, obviously domestic drivers are going to be 80%, 90% of what happens, but there is an influence from the outside. So one thing that I think is really important and not always easy to accomplish is just showing Chinese decision makers that they are being judged on their merits. So, for example, now that China is off track to the 2025 climate targets, there needs to be a very consistent message that people watch, that this is —
David Roberts
That it matters.
Lauri Myllyvirta
Yeah. They need to see that it's not just instinctive, "we hate China" or "we love China." It's about what they do actually has an impact on their external relations. The other thing is, since China wants to lead in these clean technologies, then putting up competition. So if you're thinking in terms of you want to develop market leadership, technology leadership, then if you see others stagnating, then you figure you can take it easy. You're already set for that. If you see others plunging ahead, then you need to up your game as well. That also goes for things like financing and exports of clean technology to third countries and so on.
The third one is these global supply chains could also be used as a way of creating markets, for example, for clean steel in China. If you have all those companies that are manufacturing in China, putting a premium on clean steel and asking for it, then that can drive change.
David Roberts
Interesting. Well, Lauri, this has been absolutely fascinating. I really appreciate you helping us to decode all this stuff. Maybe next year I'll come back to you and we'll do the same thing on India or Indonesia or other countries that also remain mysterious to me. Thank you for all the time.
Lauri Myllyvirta
Yeah, thanks.
David Roberts
Thank you for listening to the Volts podcast. It is ad-free, powered entirely by listeners like you. If you value conversations like this, please consider becoming a paid Volts subscriber at volts.wtf. Yes, that's volts.wtf. So that I can continue doing this work. Thank you so much and I'll see you next time.
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